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100-Year Bond King Exploits U.K. Demand

Mexico issues 1 billion pounds of securities that mature in 2114.

When a French utility completed its sale of 100-year bonds denominated in pounds in January, Mexico took note.

Four years after becoming just the second country to sell dollar debt due in 100 years, Mexico last week issued 1 billion pounds (US$1.66 billion) of securities that mature in 2114, becoming the only nation with two century bonds. U.K. investors accounted for 84 percent of buyers in the March 12 offering, said Alejandro Diaz de Leon, Mexico’s public debt chief. The sale by Electricite de France SA in January underscored the pent-up demand for longer-dated debt in pounds, according to Barclays Plc, which helped underwrite both deals.

“Mexico historically has distinguished themselves from other sovereigns in terms of always looking at creative ways of getting more efficiency in terms of their debt management strategy,” Raul Martinez-Ostos, head of Mexican operations at Barclays, said by phone from Mexico City. “Here it was really driven by real-money institutional accounts in the U.K.”

Mexico is taking advantage of growing demand for its debt to diversify financing sources after it passed legislation to end the state’s 75-year oil monopoly in December, a move that earned the country its highest-ever rating from Moody’s Investors Service. The government, which also sold 1.6 billion euros of debt in April, paid 5.75 percent to sell the pound bonds last week. That compares with an issue yield of 6.1 percent on its dollar debt due 2110.

“When EDF sold that bond, something maybe no one thought about doing became a possibility,” Diaz de Leon said in a telephone interview from Mexico City. “Ultimately it allowed us to diversify our funding sources, while sending a message about the strength of the issuer.”

Goldman Sachs Group Inc. also helped arrange Mexico’s bond sale. U.K. money managers and pension funds pushed demand for the securities to 2.5 times the amount sold, according to Mexico’s Finance Ministry. Pension funds and insurance companies like to buy long-dated securities to match their liabilities.

Trevor Welsh, who oversees 10 billion pounds at Aviva Investors Ltd., said he bought Mexico’s 100-year pound bonds because of the debt’s attractive yields and the nation’s economic growth outlook.

Yields on the longest-dated gilts, which mature in 2055, were 3.38 percent yesterday.

‘Improving Trend’

Moody’s lifted Mexico’s rating to A3, the seventh-highest investment grade, citing constitutional changes to open the energy industry to more foreign investment and broaden the tax revenue base. Moody’s projects the country’s long-term average growth rate will rise to between 3 percent and 4 percent, from a range of 2 percent to 3 percent.

Mexico is “top of the pile” among emerging-market countries, Welsh said in a telephone interview from London. “We think it’s an improving trend.”

The peso fell 0.3 percent to 13.2011 per dollar at 12:05 p.m. in Mexico City.

Mark Kedar, who helps oversee 64.1 billion pounds in fixed income at Standard Life Investments in Edinburgh, said he refrained from buying Mexico’s pound bonds after the government reduced the yield it had initially offered to pay.

Price guidance on the securities was lowered by about 0.25 percentage point, according to Barclays’s Martinez-Ostos.

“When they tightened the price talk and upsized the deal, we didn’t think that the risk premium was enough,” Kedar said in an e-mailed response to questions. “There was maybe a small amount of upside but given the potential volatility and expected illiquidity of the bonds, we didn’t think that was enough to compensate for the risks involved.”

China and the central bank of the Philippines sold $100 million of so-called century bonds in 1996 and 1997, respectively.

“There’s a scarcity for these types of bonds,” Gerardo Rodriguez, a former undersecretary of finance and public credit for Mexico who is now managing director and senior investment strategist at BlackRock Inc., said in a telephone interview from New York. “The marketplace will welcome issues like this, but not from just any government.”

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